Question

Does this clause in a irrevocable trust I am trustee to allow me the legal right to make distributions of commercial rental income the trust produces to beneficiaries to avoid the trust paying high estate taxes on that income?

Forum|Forum|2 years ago
March 2, 2024
1 reply
0 views

("POWER OF TRUSTEE: To make allocations, divisions and distributions of trust property in cash or kind, to allocate different kinds of disproportionate shares of property or undivided interests in property among the beneficiaries or separate trusts , without liability for or obligation to make compensating adjustments by reason of disproportionate allocations of unrealized gain for federal income tax purposes and determine the value of any property so allocated, divided or distributed")

Not A Product Question

M-MTax

That may cover it but it's talking about trust principal not income. Ask the atty who drafter the trust or someone who can look at the whole doc.

F

fordescort12Author

Thanks for your thoughts.

Can I ask why you belief the clause is referring to just trust principal?

I am not sure thus my posting this question and seeking thoughts from others like yourself, but my reading of the clause is that considering the clause states ("the trustee can make distributions of trust property") which is rather broad and makes no distinction between principal or income, it likely means the trustee can distribute income also the trust produces, including rental income?

M-MTax

@M-MTax We'll just have to disagree on the boilerplate nature of the adjustment power. I see it in every trust and even if not it is the trust, it is probably a default power in state law. These clauses make it clear the trustee can make such allocations even in a without an express adjustment power statute or with some more flexibility (the statues require the adoption of the prudent investor standard). See, e.g. https://legislature.vermont.gov/statutes/section/14/118/03324

That it is a boilerplate provisions does not, of course, somehow less it's grant of authority absent a more specific clause.

Finally @fordescort12 my point is that usually there is more specific grant of discretionary (or mandatory authority) to make distributions. Or a statement about the purpose of the trust (to favor current benes or remainder benes?) To use the adjust power you must evaluate whether to do the adjustment based on how it affects the different classes of benes (see e.g. the above VT link and factors in (b)(1)-(9), (c), probably document and inform all benes (at least in your required accountings).

As I wrote before with examples usually there is a very clear power in a different section for the trustee to make discretionary distributions, perhaps with broad adjectives to less possible court review ("absolute discretion" -- still have to act in good faith, but harder for an unhappy bene to challenge). Or to make mandatory distributions.

If you don't have any other language and you have legal advice to use the adjustment power when doing the taxes and your trust accounting, then do so. I still maintain the drafting attorney should have done better. It is the attorney's job #1 job to make the intent of the trust creator as clear as possible. This is not clear in my opinion. I'm not saying you can't do it, just that this question would have never come up if the trust instrument had been written more clearly.

@jtax wrote:
@M-MTax We'll just have to disagree on the boilerplate nature of the adjustment power. I see it in every trust and even if not it is the trust........

Yeah, it's not an "adjustments" clause......it's an authority to make differential allocations clause and just because you see it often does not make it boilerplate. This type of clause gives almost unlimited power to make allocations as the trustee sees fit without recourse.